The Union Budget 2020-21 contains a slew of announcements that impact your personal finance. Be it income-tax (I-T), dividends, ESOPs, home loans or definition of NRI, the budget contains something that affects that will change the way you look at financial matters. Let us take a quick look.
New income tax rates are optional
The new income-tax slabs proposed by Finance Minister Nirmala Sitharaman in Budget appear lower than the existing tax slabs. But to avail of it, you need to forego many of the tax exemptions that you claim. Those earning up to Rs 5 lakh will not pay any tax either in the old regime or in the new regime; also those earning above Rs 15 lakh a year will be taxed at the same 30 per cent rate and so there is virtually no change. Do note that the government has now kept two separate income tax structures: old and new. The new tax rates are optional, which means you can still use old rate structure.
Under the new regime, where you can’t claim any exemptions, an individual is required to pay tax at a reduced rate of 10 per cent for income between Rs 5 lakh to Rs 7.5 lakh against the current rate of 20 per cent. For income between Rs 7.5 lakh to Rs 10 lakh, he/she will pay at the reduced rate of 15 per cent against the current rate of 20 per cent. For the income between Rs 10 lakh to Rs 12.5 lakh, the taxpayer will pay at the reduced rate of 20 per cent against the current rate of 30 per cent. An income between Rs 12.5 lakh and Rs 15 lakh will be taxed at the reduced rate of 25 per cent against the existing rate of 30 per cent. Incomes above Rs 15 lakh will continue to be taxed at a rate of 30 per cent.
Kindly consult your tax advisor before choosing between old and new income tax rates. A comparison is necessary to see under which regime do you save more tax especially if you use income tax deductions and exemptions.
You have to pay tax on dividends
The Union Government has now shifted the burden of paying tax to dividend receivers, instead of dividend payers. This means if you receive any dividend from stocks and mutual funds, you will have to pay the tax.
This change means that the dividend shall be taxed only in the hands of the recipients at their applicable rate, so if you are in a high tax bracket, the tax on dividend will be higher. Those falling in 20-30 per cent tax bracket will end up paying more taxes compared to earlier as they used to pay no tax on dividend income of up to Rs 10 lakh. Earlier, DDT was charged at 15 per cent plus cess, etc.
Do note that there will be 10 per cent TDS on dividends paid by companies, MFs, etc. Dividends up to Rs 5,000 per year to be exempt from tax liability. Anything above this limit will attract TDS. You can always file income tax returns and claim any extra tax taken by TDS.
For high-income investors that invest in mutual funds, the DDT change means that investor flows are likely to get diverted to growth plans over dividend plans given LTCG/STCG tax is lower than the marginal tax rate at which dividend will be taxed.
Employees of start-ups get ESOP tax relief
The burden of taxation on the employees due to ESOPs, which are taxable as perks at the time of exercise, has been relaxed by deferring the tax payment by five years or till they leave the company or when they sell their shares, whichever is earliest. The change will take effect from April 1, 2020.
Start-ups employ employees at a relatively low salary amount with the balance being made up via ESOPs. The taxation of ESOPs is split into two components-- Tax on perquisite as income from salary at the time of exercise and Tax on income from capital gain at the time of sale. Since ESOPs are taxable as perquisites at the time of exercise, this leads to cash flow problems for the employees. They had to pay tax on this irrespective of whether or not you had realized the monetary value of the ESOPs.
With the new ESOP tax relief, things will be better. Note that the start-up needs to qualify under Section 80-IAC of the Income Tax Act for this.
The ESOP tax relief means that there will be greater flexibility to the employers and employees in the structuring of their employment prospects.
Timeline to avail loan for affordable housing extended
The government has proposed to extend by one more year the additional deduction of Rs 1.5 lakh for interest paid on home loans taken for buying affordable homes.
In the July Budget 2019, the maximum amount of interest paid on a housing loan eligible for tax benefit was increased to Rs 3.5 lakh from Rs 2 lakh earlier i.e. an increase of Rs 1.5 lakh for buying a house under the affordable housing scheme.
So, Budget 2020 has extended deduction available under Section 80EEA to the next financial year.
NRI definition changed
The Budget 2020 has also made a change in the number of days one NRI needs to be outside of India to be considered as a Non-Resident Indian. In effect, to be an NRI now, you will have to be outside India for more than 245 days, about two months more compared to the earlier norm of 183 days. These changes also take effect from April 1, 2021, and from the assessment year 2021-22 onwards.
Plus, the Finance Bill 2020 had proposed that an Indian citizen shall be deemed to be resident in India if he is not liable to be taxed in any country or jurisdiction. This is an anti-abuse provision since it’s noticed that some Indian citizens shift their stay in low or no tax jurisdiction to avoid payment of tax in India. The new provision is not intended to include in tax net those Indian citizens who are bonafide workers in other countries.
Per year limit set for tax-free employer’s contribution to NPS, PF
Union Finance Minister Nirmala Sitharaman has rationalized the tax treatment of employer’s contribution to recognized provident funds, superannuation funds, and national pension system (NPS), by putting in an upper limit of Rs 7.5 lakh a year for such contributions. The new limit will come into effect from April 1, 2021.
While an employee with low salary income is not able to let employer contribute a large part of his salary to all these three funds, employees with high salary income were able to design their salary package in a manner where a large part of their salary is paid by the employer in these three funds. Thus, this portion of salary does not suffer taxation at any point of time, since Exempt-Exempt-Exempt (EEE) regime is followed for these three funds (NPS, provident fund and superannuation fund. Therefore, it is proposed to provide a combined upper limit of Rs 7.5 lakh in respect of the employer’s contribution in a year to NPS, superannuation fund and recognized provident fund and any excess contribution is proposed to be taxable.
The writer is a journalist with 14 years of experience)